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Threats and opportunities facing retail pharmacy

Traditional drug store retailers seek to become one-stop healthcare destinations amid competition from online players and others.
Mark Hamstra
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Drug store retailers are under increasing pressure from multiple competitive threats, including a growing raft of online pharmacies, as well the ongoing threats posed by mail-order pharmacy and business challenges such as reimbursement and the tight labor market.

In addition, front-of-store categories are also under pressure from online and specialty retailers, as well as from the proliferation of dollar stores and the expansion of the dollar stores’ assortments into more HBC products.

However, drug stores are reinventing themselves to compete in this environment by adding more clinical services and transforming into one-stop healthcare destinations with a range of offerings. In this way, they are approaching convenience from the perspective that providing a more holistic health care experience can simplify the process for patients and at the same time improve healthcare overall.

“I think there's a number of challenges which are coming to a head,” said Rodey Wing, a partner in the health and retail practices of global strategy and management consulting firm Kearney. “One, you have ongoing reimbursement pressure. The reimbursement level for drugs continues to decrease, so profit margin on the core part of the business is under pressure.”

Operating a retail pharmacy is a “scale” business, he said, which means sales volume needs to remain at a level that supports the fixed costs of the store and the labor costs associated with employing a staff of pharmacists and pharmacy technicians.

“As you have a bunch of new niche solutions or home delivery solutions coming on, it chips away at that volume,” said Wing.

These cost pressures come at the same time that retail pharmacies are seeking to cope with a tight labor market that has been exacerbated by the pandemic. Pharmacists have been under increasing pressure for the last few years, which has led to an increase in retirements and a slower uptick in new hires, which in turn has led some drug stores to reduce their operating hours.

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“That starts a bit of a vicious cycle, because it starts to impact volume, and then that volume drives lower profitability and becomes a bit of a challenging spiral to get out of for retail pharmacy,” said Wing.

In the front of the store, traditional drug retailers have had difficulty competing on convenience, he said. The growth of online players such as Amazon and others have made it easy for consumers to fulfill immediate needs without a visit to their local pharmacy, eroding the convenience factor that many drug stores have long leveraged.

In addition, drug stores in business districts have lost some of the front-of-store traffic they previously enjoyed from workers who may now be working from home at least part of the time.

Drug store assortments have also become more homogenized across locations among many retail operators, said Wing, reducing their local relevance to the needs of individual communities. Many drug retailers also struggle to compete on price for front-of-store items, said Wing.

“When you have dollar stores popping up nearby, it’s become even harder to try to maintain that premium [price positioning], particularly given the size of premium that they’ve tried to maintain,” he said.

Jonah Ellin, chief product officer at 1010data, a retail analytics firm, said he believes online players in the pharmacy space pose a bigger threat than the traditional retail industry may be acknowledging.

“It's a repeat of what happened with the independent pharmacies and drug stores getting taken on by the chains, but now the chains are being taken on by online,” he said. “And people are saying the same things—that customers won’t like giving up personalized service. They said it when customers went from independent drug stores to chain drug stores, and now the chains are saying it as customers go online.”

Drug store retailers need to take a closer look at what their customers need and want, and figure out ways to execute against that in the store to differentiate themselves, he said.

Although the online pharmacy players have largely offered a narrow assortment of medications—often emphasizing low-priced generics—they could expand into providing more products and services over time, Ellin said.

“I think right now they're starting with high-priority, high-volume [products] … and then they'll be taking those customers that they've gained, and trying to determine what else those customers need, what else they want. On one hand, it's a smart way to start an efficient business. On the other hand, people do tend to want to consolidate their purchases, especially in healthcare, so that it's more convenient for them.”

That bundling of healthcare products and services is at the heart of drug stores’ efforts to transform themselves with the addition of clinics, in-store screenings and tie-ins with other healthcare providers. It presents opportunities for brick-and-mortar retailers that can execute this type of experience in their stores, leveraging the data they have about their customers to help determine their needs, said Ellin.

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On the other hand, some consumers will always be attracted to the retailer or platform that can offer products at the lowest price, he said, citing Amazon’s RxPass generic drug offering as an example. It remains to be seen how companies such as Amazon and other low-cost providers, such as Mark Cuban Cost Plus Drugs, will evolve and expand over time, and if they can succeed in attracting additional volume from traditional retailers.

When it comes to HBC and cosmetics, online retailers are capturing some share from traditional drug store retailers, but consumer interest in online sources for these items may vary, according to Ellin.

“The ‘higher touch’ the category is, the less threat there will be,” he said.

Customers who buy the same products regularly may be inclined to look for more convenient or low-cost options, but many consumers prefer to see, touch or sample these products before buying them, which provides “a distinct advantage for the in-store experience,” Ellin said.

Perhaps the biggest threat to sales for front-of-store categories lies in the potential erosion of in-store pharmacy sales, which would result in fewer shopper trips to the store. In addition, some of what Ellin described as “mission-based” brands—in niches such as organic or animal-free—are ripe for migration to online platforms as well, he said.

  • Loyalty, mobile apps key to retail pharmacy

    One of the key tools that retail pharmacies have at their disposal are their loyalty programs and mobile apps, said Amar Singh, senior director at business consulting and analytics firm Kantar.

    “They are themselves telehealth delivery centers, for both physical and mental health,” he said of the mobile apps of chain pharmacies such as CVS and Walgreens.

    Customers can use the apps to set health and wellness goals, manage chronic conditions, schedule deliveries and more, as well as access their loyalty membership benefits.

    “The apps have become resource centers, and the strength of the ecosystem is amplified through their media networks as well,” said Singh, referring to the digital advertising platforms that retailers can offer to product vendors. “The apps have become healthcare resources for consumers, and that’s how retailers are going to keep their core shoppers engaged and keep them in the fold, and also provide services.”

    Mobile apps can also help retailers personalize their communications with their customers, and cross-promote products based on shopping history. That is an area that is gaining increasing traction through the increasing sophistication of machine learning and artificial intelligence, said Singh.

    Rodey Wing, a partner in the health and retail practices of global strategy and management consulting firm Kearney, agreed that loyalty programs are most effective at engaging the existing customer base, and keeping them engaged.

    “It's really a customer retention program, and it's an opportunity drive a bigger basket,” he said.

    He said that while retail drugstores do “an OK job” with their loyalty programs, other segments of retail have done more to optimize the opportunity that a strong rewards program can provide.

    “I think the primary challenge with the loyalty programs that we see in pharmacy is that they're not designed to be really engaging programs,” said Wing. “They're not something that’s super top of mind for the customer, which is why I think they struggle to drive traffic and certainly struggle to really bring in the customers that are not already in their direct orbit.”

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Pharmacists to the rescue

Despite the growth of niche online pharmacy providers, the retail pharmacy can be expected to remain the main source of fulfillment for prescription drugs for most consumers, said Amar Singh, senior director at business consulting and analytics firm Kantar.

“The drugstores are reinventing themselves to become primary healthcare centers, and they're going to leverage the pharmacy network to become a holistic, one-stop-shop for consumers’ primary healthcare needs,” he said.

For traditional drug stores, that includes efforts to refine their overall product assortments to focus on health and wellness.

“They're focusing on appearance, mental health, physical health, holistic healthcare, nutrition—and you see that across the new products that they're adding to the stores,” said Singh, citing options such as plant-based alternatives and other products perceived as better-for-you.

The pharmacist will be at the heart of drug stores’ efforts to become more holistic healthcare destinations, he said. Patients have trusted relationships with their pharmacists, he said, and they can be the gateway to the full range of healthcare services that drug stores will increasingly provide.

“That's why there are loyal customers who will stick with CVS and Walgreens, and they're loyal to certain locations,” Singh said. “That's what makes the difference—that you have a relationship with the pharmacist.

“Drug stores understand that, and that's why they're expanding their healthcare services, with services like the MinuteClinic, where everything is attached back to the pharmacist,” he said. “The pharmacist is the most important resource that they have, and that's something that pulls in all the shoppers and keeps them within the ecosystem.”

Drug stores will increasingly turn to automation to help ensure that pharmacists are available for patient interactions in the stores, Singh said. This has become even more critical amid the ongoing pharmacist labor shortage.

In addition, one of the keys for drug store operators to be successful in becoming a primary destination for healthcare will be digital connectivity and the ability to communicate with doctors and other healthcare providers, he said.

Ellin of 101data agreed that the potential to fulfill multiple healthcare needs in one visit is a key strength of the retail drug store.

“I think there's an aspect of convenience that can and should be serviced through those in-store experiences,” he said. “If you are executing well in-store, you can meet those more emergent needs, where someone didn't know they were going to need a prescription and potentially three or four things to go with it, be it over the counter medications or bandages, or wound care, etc.”

An ideal scenario might be one in which the patient turns to the drug store for all of their post-physician-visit needs, said Ellin. The patient’s information would be updated in a computer system, so that everything that has been recommended, including the prescription, any OTC products, foods and beverages, can be obtained on site.

“It's all available right there,” he said. “I can walk out with a bag, and my journey's over.”

The key is having all of the patient’s information available in one place, and leaving it up to the consumer to decide how they want to fulfill their needs. Some might want to have the products shipped directly to them, for example, while others might want to pick them up at the stores and consult with the pharmacist.

“I think getting that balance correct, and allowing people to choose how they interact is key,” said Ellin. 

Wing of Kearney said he thinks drug stores need to be more aggressive in their efforts to become more holistic healthcare destinations, and leverage the full scope of practice that pharmacists have.

“I think that is a very strong lever that pharmacies are starting to pull, and as an industry, we need to pull more aggressively,” he said.

As drug store operators gain a better understanding of the individual needs of their customers, they will increasingly tailor their offering to meet those needs, said Wing.

“That could mean being really thoughtful about how to engage the cash customer or the discount-card customer differently, or how to think about delivery for the customer for whom that’s really important,” he said. “You are starting to see a lot more exploration in terms of how to best meet those needs through the local retail pharmacy, and I think that’s quite positive.”

Wing agrees that drug stores also need to consider solutions that make their operations more efficient, including tools such as automation and centralization.

Another key consideration is how the store design itself might evolve as drug stores expand their offerings to include more healthcare services.

“It dramatically changes how you need to structure the operations in the store,” said Wing. “It dramatically changes how you think about workflow and how you think about store layout. As healthcare services really start to pick up, there's going to be more and more need to reevaluate some long-held beliefs in terms of how to run the operations in a retail pharmacy.”

  • Independents can compete with online pharmacy

    Independent retail pharmacies can compete with anyone—provided there’s a level playing field, said Kurt Proctor, senior VP of strategic initiatives at the National Community Pharmacists Association.

    “It's when PBMs or others are forcing pharmacies out of network or making economics difficult for them—that's when the challenges arise,” he said. “When insurance company PBMs own their own pharmacies and are directing that business, then that certainly is a big challenge for all pharmacies, including independents.”

    Proctor said online pharmacies, such as Mark Cuban Cost Plus Drugs, which are offering a limited number of mostly generic drugs at low prices, could disrupt the market to some degree, but more importantly they shine a spotlight on the economics of the pharmacy business in the U.S.

    “Hopefully independent pharmacies will be in a position to capitalize on some of that disruption in the marketplace,” he said.

    The COVID pandemic, meanwhile, helped highlight the critical role that local community pharmacies, pharmacists and pharmacy technicians play, particularly in underserved rural and urban communities. Payors have seen the value that local pharmacies can provide, said Proctor, and they come to expect them to provide more services, such as testing, prescribing birth control, pharmacogenomics and immunizations.

    “Independents are very, very well-positioned to help with that,” he said. “They’re positioned well to help health plans deal with the different metrics that their performance is measured on, and they're closing healthcare gaps.”

    NCPA created the CPESN clinically integrated network to help independents leverage the potential competitive advantages that come with broadening the scope of their practice and demonstrating the benefits they can provide in terms of patient outcomes and healthcare savings.

    When it comes to competing with online pharmacy players, independents also have the experience on their side. In addition, many independents have been making their other HBC offerings available online, and have been partnering with technology vendors to ramp up their e-commerce capabilities to meet the demands of those customers who prefer to shop online.

    “The problem comes when patients are forced to use one pharmacy or one channel against what is really their own consumer will,” said Proctor.

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